Fraudulent Chinese corporations are nothing new - we have been warning about them since late 2010, spurring the creation of a cottage industry focused exclusively on unmasking such public reverse merger companies (and generating trading profits along the way). One company, however, which apparently was completely unaware of the how pervasive Chinese corporate fraud, is industrial machine titan Caterpillar. This was made clear when, after hours on Friday night of course, the company revealed that it had been misled by "deliberate, multi-year, coordinated accounting misconduct" at a subsidiary of a Chinese company it acquired last summer, leading it to write off most of the value of the deal. In the process it would also take a $580 million, or $0.87 cent charge to earnings, which would wipe out more than half its expected earnings of $1.70 for the fourth quarter of 2012. One wonders, however, is there more to this story than just a case of a gentle, naive board duped by fraudulent, evil, cunning "Chinamen" which may have watched one too many episodes of Autonomy does Hewlett Packard?

A well managed, successful American company gets defrauded for half a billion dollars. China is a cesspool of fraud and deceit. A lot of big companies will rue the day they invested in this Asian Potemkin village.

Around fourteen years ago...some Asian guy appeared out of thin air...bought up several major Asian sewing machine companies, and then started to find capital interest for buying Singer, along with various French, Italian, and German sewing machine companies. He was creating this massive company to manage all sewing machine empires.

So the day came when he approached a New York bank and wanted in excess of $500 million to conclude a deal for a major Russian sewing machine company. This bank was down to the final moments of the deal, and then some young executive was sent on a plane to Russia to just view the factory before they did the final approval.

He shows up in a taxi at the front gate of this factor that is over 100 years old, and in terrible shape. He spends around thirty minutes (by description of the article I read) with the security guard, and comes away with the idea that this company hasn’t made a profit in their entire history...so that’s not much of a way they are worth $50 million....let alone $500 million. They stopped the deal.

Within months....this entire empire began to fall apart, and almost every country touched by this Asian guy....ended up in bankruptcy court and taking over the old company because of incompetence in financial handling.

A smart company will "invest" in China knowing exactly what it is getting out of it.

The book value of a company's "investment" in China, as reported on the company's balance sheet, should be listed at $0. The only value this "investment" has is its capacity to produce large quantities of cheap crap by slave labor that can then be sold in the U.S. (and elsewhere) for a monetary return.

This is why Apple outsources the production of their iPhone components to China. The company doesn't even pretend it has a financial stake in the Chinese companies that produce these things. All Apple cares about is that these Chinese "assets" -- with no nominal value at all on Apple's balance sheet -- can produce components that are shipped all over the world and sold to consumers. The only "asset" Apple cares about is the finished product and the price it fetches in the mobile phone market.

A friend who works as an analyst for a medium sized venture capital company(’medium’ in this league means pretty dam big for most people or companies). They are tough, competent investors(or short sellers if they think the investment is hyped or overpriced bs, which is one reason while CEOs don't really like such companies. He was sent by his boss to China for a due diligence walkabout on their Chinese holdings or potential investments. Most were ok, one was an empty lot. Most applicable maxim...If you dine with the devil, best have a long handled spoon. Should I even ask if the US taxpayers will bail Caterpillar out of this financial poop puddle?Rather than blame the evil Yellow Peril, I suggest that we concentrate on due diligence by our own companies. Our labor force is fairly comfortable on unemployment, welfare, and a social welfare network that provides for a higher standard of living than working folks in most of the rest of the world, and our Fascist business structure can rely on taxpayer bailouts, complete with cushy bonuses for executives. TWB

Chinese companies range from efficient, well-run producers of top-quality goods all the way down to the lyingest scam artists on Earth. China produces great stuff, and China produces utter crap.

Everything you have heard about China - good and bad - is true. China is so huge that both realities exist simultaneously.

Joint ventures with Chinse firms obviously involve much more risk than merely buying finished products, and therefore require much more due diligence. Many American companies have built successful new venture in partnership with Chinese firms. But it sounds like Caterpillar - like HP - got a little lazy with the research in their zeal to make some easy money.

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